Japan looks toward capital deficit with resilience

Commentary: Business leaders begin to look outward once again

TOKYO (MarketWatch) — World economic policy makers and commentators have been posing a fateful question for some time. What happens when flows of Asian savings into Western banks and capital markets dry up?

Gov. Zeti Akhtar Aziz, the veteran head of the Malaysian central bank, has been particularly forthright in her views that this will be a wake-up call for the West. Well, we may find out more quickly than people thought. Japan recorded a 437 billion yen current-account deficit in January, the biggest monthly shortfall since records began nearly 30 years ago. This follows recent signs of an end to large current-account surpluses in China as the Beijing authorities shift toward consumption-based domestic economic expansion away from export-fueled growth.

In Japan, upheaval has forced progress

(3:43)

A year after Japan's earthquake the effects of it are still felt across the country, in subtle and sometimes positive ways, Phred Dvorak reports on the News Hub. Photo: Ko Sasaki for The Wall Street Journal

The slowdown in funds flowing overseas from the world’s two largest owners of foreign-exchange reserves is actually a sign of a healthy rebalancing of the world economy. The counterparty is smaller current account deficits in the West, as economies (particularly in Europe) tighten belts and try to rein back unsustainable borrowing. But the knowledge that the two large Asian creditors may become capital importers at some stage in the next few years may sharpen German-style demands for more austerity in Europe and the U.S. — just the opposite of what the world needs right now.

Is the current-account deficit in Japan (following a full-year trade deficit in 2011, the first in more than two decades) leading to an outpouring of national gloom? Not a bit of it. In a week of speaking to leading industrial and financial figures in Japan, I can report — a year after the disastrous earthquake that hit the northeast on March 11, 2011 — a mood of steely resolve and even a revitalization of key parts of industry.

The reasons are fairly straightforward. Business people say that Japan is moving out of two decades of introspection, in which it became a great deal less international than in the fast-growth years after the Second World War when it exploited booming export markets to post Asia’s first economic miracle. Larger and smaller companies alike are looking to overseas investment and acquisitions as a method of expansion. This means that, amid the sobriety of the earthquake anniversary commemorations, Tokyo is notable for a new spirit of chutzpah. “There are genuine changes in the traditional structure of most industries, including the service sector,” says one well-placed business figure.

The transformation is driven by a myriad of interconnected factors.

Anxiety about higher energy costs after a mooted shift away from nuclear power is prompting companies to seek less expensive manufacturing sites abroad. Operations of Japan’s 54 nuclear plants are planned to be suspended from end-April. Some are likely never to reopen. So energy companies have to resort to more expensive thermal power plants. The need to rebuild supply chains abroad is also sparking the go-overseas reaction. Tougher competition on regional export markets — Korea, China and the ASEAN countries — is exerting its toll on direct Japanese sales abroad.

Above all, the shock of the soaring yen (although it has softened in recent weeks, giving a much-needed fillip to the Nikkei index) has encouraged many denizens of Japanese industry to redraw their previously Japan-centric business plans. This is similar to action by German companies in the 1970s and 1980s to transfer manufacturing outside the country in response to the higher d-mark — a response which eventually led to the introduction of the euro as a means of damping the appreciation.

As German companies know well, a higher currency brings advantages as well as difficulties, for it allows hard-money companies to make acquisitions much more cheaply. This is a benefit that Japanese groups mean to exploit to the full, even though many companies have become sadly bereft of competent middle-managers with adequate international experience and linguistic skills. “Companies have the money, but not the people” for foreign expansion, says one insider.

Belief that Japan will move toward a lasting current-account deficit, which could lead to a new dependency on foreigners buying government bonds as an ageing society draws down savings, has heightened speculation about an eventual fiscal crisis. This provides the background to the long-running dispute on whether the government should raise consumption taxes to lower the budget deficit and rein back the debt-to-gross domestic product ratio of well over 200%.

For the time being, though, no one’s panicking. The government borrows 10-year money at 1%. The Bank of Japan has injected useful stimulus through extending its quantitative-easing program. Japan has known its fair share of pessimism over the past two decades. But now, after the upheavals and trials of the past 12 months, the pendulum is swinging back to greater confidence in the ability of Japan’s corporations and society to weather the challenges.

Intraday Data provided by SIX Financial Information and subject to terms of use.
Historical and current end-of-day data provided by SIX Financial Information. Intraday data
delayed per exchange requirements. S&P/Dow Jones Indices (SM) from Dow Jones & Company, Inc.
All quotes are in local exchange time. Real time last sale data provided by NASDAQ. More
information on NASDAQ traded symbols and their current financial status. Intraday
data delayed 15 minutes for Nasdaq, and 20 minutes for other exchanges. S&P/Dow Jones Indices (SM)
from Dow Jones & Company, Inc. SEHK intraday data is provided by SIX Financial Information and is
at least 60-minutes delayed. All quotes are in local exchange time.